How Santander will use Ripple to execute cross-border payments | Analysis of the deal

By David Beach | 16 January 2018

Ripple has caused quite a stir (we resisted the pun) in the cryptocurrency market. Recent dips and spikes of XRP, Ripple’s cryptocurrency, have caused many commentators to question the long-term durability of the currency.

However, few can deny that Ripple is being closely watched by the banking goliaths, and is tipped by many to be the first mainstream use of blockchain technology in the financial sector.

bobsguide sat down with Marcus Treacher, Global Head of Strategic Accounts at Ripple and Ed Metzger, Head of Technology Innovation at Santander UK, to discuss what the recent deal with American Express to provide frictionless cross-border payments between the US and UK, using the Ripple network, means for them, for blockchain and the future.

For the sake of addressing the hype, Marcus, can you spell out what blockchain can and can’t do in payments?

Marcus Treacher (Ripple): The technology that makes up blockchain has incredible potential, but it’s been introduced into a world that is not equipped to realise that potential yet. The way information is recorded, reported and managed today is still the same, unsophisticated way it has been for decades. Blockchain will have a profound impact but because the world is so dysfunctional today it will take time to embed that technology and begin the transformation.

Wouldn’t the status quo companies, such as SWIFT, be scared of that transformation, and do everything possible to halt it?

Ripple: I think it comes down to a tipping point. Blockchain is happening at the same time as a number of emerging technologies; it’s the perfect storm of technological innovation. These technologies are prompting regulatory change as regulators take note and open up the banking industry accordingly – take PSD2, for example - undermining the models that traditional banks have sat in for a long time.

For the first time in years, it won’t suffice to incrementally improve. Plenty of companies with their head in the sand are quite content to do the same thing each year; those companies will die off in the next 5-10 years. Once customers know that better alternatives exist, the tipping point becomes inevitable.

Is this why Santander have invested in Ripple?

Ed Metzger (Santander): I lead the technology innovation function here at Santander UK where we look at how we can leverage new technologies to improve our customer service.

Santander’s approach to innovation is to cover as many bases as possible. We have a formal innovation structure in all geographies. We have a fintech investment section called InnoVentures all the way to embedded innovation units in the Santander world. We try and focus our attention on those technologies making a big influence in the banking industry. One of those was Ripple.

Would Santander have partnered with a company like Ripple in 2015?

Santander: There’s been interest in blockchain for some 5-10 years, but the technology has yet to mature. Now that the technology has been fleshed out it has become apparent that there are concrete use cases where blockchain can make a difference. That difference is what Santander hopes to leverage.

Marcus, you previously worked at SWIFT. Is Ripple a challenger to SWIFT?

Ripple: I think Ripple is going to disrupt the world within which SWIFT exists, for the better. SWIFT will have two choices, either to move with the changes or lean into their unique value as a governing body representing thousands of banks. SWIFT has been incrementally improving its technology - with gpi, for instance - but it is yet to make that fundamental shift.

To analogise this, when it comes to improving payment technology, it’s not about putting faster trains on the existing rail infrastructure. It’s about building an airplane. SWIFT gpi is a n incumbent reaction to a landscape that is seeing the beginning of change that they’re not prepared to adopt.

Does this mean that Santander is moving away from conventional payment networks?

Santander: Of course not, we still offer a large range of services using payment schemes that we think work well and have the advantage of universality; they provide a great customer service. I think a better way of framing the question is looking at certain customer needs and demands and looking to emerging tech to see how they can solve them.

What specific pain points have you heard from the community?

Santander: The feedback we’ve had from retail, SMEs, financial institutions and corporates have mainly revolved around the uncertainty and transparency of when a payment will arrive with the current SWIFT model. This is becoming more important in a time when exchange rates are moving volatility.

This is how we came to use the Ripple network, which had massive potential. We chose Ripple because of its speed, transparency and certainty. These three characteristics provide relief to the pain points of international payments.

18 months ago, as part of our assessment we ran a proof of concept with Ripple which we rolled out to our staff in app form as a way of proving the customer experience. It turned out to be very successful and we’re now proactively looking at how to bring it to other parts of the Santander Group.

How does Ripple bypass the scalability issues of blockchain’s practical uses?

Ripple: Part of that is recognising from the offset that we’re building in the existing world, and that elements of the ‘perfect blockchain dream’ do not work.

To get around that, Ripple deconstructed our blockchain into pieces of blockchain technology, each of which has a value for a certain task. By taking this approach, we can scale infinitely without needing to worry about ‘using all the computers in London’ as skeptics frequently put it. That wasn’t by mistake, we designed our blockchain to be scalable.

The way we did that was by taking the technology and rethinking it along the lines of Tim Berners-Lee’s pioneering work on the internet. We took the idea of infinite IP (Internet Protocol) and created a version of transferring value instead of information.

We connected our proof of work (cryptography) to an internet model where the banks act like web servers and the protocol they use to talk to each other is the inter ledger protocol (ILP). We then made the ILP public and in so doing replicated the internet. In effect, an item of value only leaves one bank when it’s been confirmed by the receiving bank.

If you took it one step further and were able to see the macro payments picture in full, you’d see roughly 300 islands of currency - Sterling, Dollar, Euro, Yen - within those islands payments are fast and efficient but currently there’s no inter-island connection service other than SWIFT.

In the future we’ll have thousands of these isolated islands as supply chains of value - trading houses or clearing exchanges - that have adopted blockchain and cryptocurrencies. Ripple provides the internet of value between the islands regardless of how many blockchains or currencies each island may have, they can still connect to the internet via Ripple technology.

We’ve done proof of concepts in the lab where we’ve moved a dollar through various currencies in under a few seconds. Our current record for a cross-border payment is 2 seconds. When compared to the three days taken on conventional methods, this is extraordinary.

Another benefit of Ripple is that our immediate payments means fee transparency, so you know how much to send in one currency to get the desired amount in another. A good story is when SEB, our partner bank in Sweden, connected their corporate clients to the Ripple network.

Usually, the treasurers in these corporates would send funds in the morning to New York and have to wait until 3pm to get a response on the funds. Using the Ripple network via SEB, the treasurers could see in seconds after 9am that their funds were in the New York office and they could go about their day.

What does Ripple do that SWIFT gpi doesn’t?

Ripple: Aside from the much shorter payment wait - 4 seconds compared to 3 days - Ripple differs from SWIFT’s messaging service in that Ripple’s nodes are constantly communicating but moreover, is actually settling the transaction between the two banks.

The next level problem with international payments is liquidity. a cryptocurrency like XRP will enable  banks to fund other accounts by using a global currency. This will be particularly beneficial for settling accounts in Africa or Latin America, where local currencies are fairly illiquid, whilst also going a step further towards financial inclusion.

In summary, by using a piece of blockchain technology we are able to scale, and we are able to create an internet of value whereby our high speed cryptocurrency acts as the settler and liquidity tool.

What sort of products could we see Santander using blockchain technology on five years into the future?

Santander: That’s a very big question. We’ve got a blockchain lab where we ask these kinds of questions. For us, the key is thinking about customer needs and problems that can be solved by blockchain; this is what will drive the technology into mainstream usage.

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